MBE Rules · Business Associations
Shareholder Derivative Suits
Cal. Corp. Code § 800
The rule
A shareholder may bring a derivative action to enforce a right of the corporation. Requirements include contemporaneous ownership at the time of the alleged wrong, fair and adequate representation of similarly situated shareholders, and a written demand on the board (unless demand is excused as futile).
In plain English
A shareholder derivative suit allows a shareholder to sue on behalf of the corporation to address wrongs done to the corporation itself. To bring such a suit, the shareholder must have owned shares at the time of the wrongdoing, represent the interests of other shareholders fairly, and typically must make a written demand to the board before filing the suit, unless that demand is deemed futile.
Worked example
Jane, a shareholder of XYZ Corp, notices that the board has made a decision that she believes harms the company. She has owned shares since before the decision was made and submits a written demand to the board to take action, but they refuse. Jane then files a derivative suit against the board, which is allowed because she met all the requirements.
Memory hook
Shareholder suits: Own it, represent it, demand it!
The trap
Exams often include fact patterns where students overlook the requirement of contemporaneous ownership or fail to recognize when a demand is futile, leading to incorrect conclusions about the viability of the suit.
How examiners test it
Questions typically present scenarios involving corporate mismanagement or wrongdoing, testing whether the student can identify the necessary elements for a valid derivative suit and the implications of demand requirements.
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